Venture capital firms can back competing AI startups, and many now do. The old expectation that an investor would finance only one company in a category has been weakened by how quickly AI products change markets and by the enormous capital required to scale them. That flexibility creates a governance and trust problem: founders must weigh an investor’s money and connections against the possibility that rivals, board members or newly hired executives could gain access to sensitive information.
The unwritten rule is under pressure
For decades, a practical venture norm was simple: avoid financing two companies that compete head-on. The arrangement was never a universal law, but it helped founders believe that a lead investor would not place a direct rival in the same portfolio. A firm could still encounter conflicts, yet concentrated portfolios and relatively stable market boundaries made them easier to identify.
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AI is disrupting that model. Products that begin in separate categories can converge within months, while startups regularly add features that move them into a neighbor’s market. TechCrunch reported on October 15, 2026 that Benchmark partners discussed this problem at TechCrunch Disrupt. Benchmark partner Eric Vishria described the pace as unavoidable: “The harsh reality of this world is every company is evolving very quickly.”
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Outbyte Driver Updater FREEScan for outdated or missing drivers - takes under a minuteDriver Scan →Outbyte PC Repair FREEClear out junk files and repair common Windows errorsFree Scan →The result is not a settled replacement for the old pact. It is a more fluid system in which investors, founders and boards must negotiate conflicts as they emerge.
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Can a VC back two competing AI startups?
Yes. There is no universal rule that prohibits a venture firm from investing in both sides of a competitive market. Whether it is acceptable depends on the firm’s contracts, its information-control procedures, board roles, disclosure practices and the founders’ willingness to proceed.
AI makes overlap unusually common. The TechCrunch account notes that OpenAI and Anthropic share dozens of investors, an indication that investors can end up backing companies whose products, customers and research agendas increasingly intersect. Shared investors do not by themselves prove that confidential information moved between companies, but they raise the stakes of every governance decision.
| Issue | Traditional venture pact | AI-era reality |
|---|---|---|
| Portfolio overlap | One company per clearly defined category | Multiple companies whose markets can converge quickly |
| Information controls | Informal trust backed by partner and board discretion | Explicit confidentiality terms, access limits, partner separation and disclosure expectations |
| Capital needs | Smaller, concentrated early-stage funds | Larger vehicles that can support early rounds and later growth financing |
| Founder trust | Perceived loyalty to a long-term partner | A trade-off between network access and the risk of sharing an investor with a rival |
| Conflict trigger | Usually a direct competing investment | Investment overlap, a pivot, employee movement, board access or a new product launch |
What happened between Factory and Cognition?
The conflict became concrete in the case of Factory, an AI coding-agent startup, and Cognition, the company behind Devin and a direct rival. Factory removed board adviser Chris Degnan after alleging “unethical conduct involving Cognition.” Degnan said he had already resigned and denied sharing confidential information. He later announced that he was joining Cognition as chief revenue officer.
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Khosla Ventures backs both Factory and Cognition. That relationship illustrates why the issue extends beyond investment paperwork. A person with board-level access can leave for a rival, and an investor can remain financially connected to both companies while their markets move closer together. Public accounts describe allegations and competing statements, not an adjudicated finding that confidential information was disclosed.
Why board and hiring decisions matter
Conflicts can arise even when an investor never intentionally shares a document. Board advisers and directors may hear product plans, pricing strategies, customer information, hiring plans and fundraising details. A subsequent move by one of those people to a rival can create suspicion or a dispute over what was learned, what was independently developed and what obligations continue after departure.
How firms try to protect confidential information
There is no single industry-standard “conflict wall” established by regulation. Founders should treat safeguards as practices to inspect and negotiate, not as automatic protections.
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Information barriers and need-to-know access
A firm can limit which partners receive a company’s sensitive materials, keep deal teams separate and restrict internal circulation of board documents. These controls are meaningful only if the firm explains who can access information and enforces the limits in practice.
Confidentiality and disclosure terms
Investment documents and side letters can define confidential information, permitted uses, disclosure exceptions and procedures when a competing investment is proposed. Founders may seek advance notice, a chance to object, or a commitment that specified partners will be recused from a new deal.
Board-seat and adviser policies
Companies can distinguish between a voting director, a board observer and an outside adviser, each with different access rights. They can also set rules for recusal, document retention and the handling of information after a person leaves the role.
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Conflict review before a new investment
Before accepting a rival investment, a firm should map overlapping products, customers, employees and strategic plans. A written review can identify whether the conflict is manageable, whether a partner must step away, and what disclosure the existing portfolio company deserves.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Why Benchmark is a useful test case
Benchmark built its reputation on concentrated early-stage investing and long relationships with founders. A TechCrunch report published June 3, 2026 said the firm had closed $2 billion across two new funds: a $1.25 billion later-stage vehicle and a $750 million early-stage fund. That was a major change from more than two decades in which its funds were generally around $425 million or less.
The larger structure gives Benchmark more flexibility to invest across stages as startups mature. The firm’s traditional approach often involved taking about a 20% stake in each startup. The newer model is designed for an AI market in which a company may require substantial follow-on capital rather than a single small seed check.
TechCrunch also reported that Benchmark led a $75 million round for Manus, which reached $100 million in annual recurring revenue within eight months of launch. Those figures show why a firm may want the capacity to support winners through rapid expansion, while also explaining why founders may worry that the same capital base will finance a future competitor.
What Benchmark says its safeguards are
Vishria said Benchmark remains committed to each founder, keeps what it learns confidential and does not consider itself a product or technology expert. That position treats confidentiality and relationship management as the firm’s core protections even when portfolio boundaries blur.
For founders, the practical question is whether those assurances are backed by specific procedures. Before taking money from a firm that already backs a potential rival, ask:
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- Which partners and staff can access board materials and confidential data?
- Will the firm disclose a proposed investment in a competing company?
- Can named partners be recused from the rival deal or from future board discussions?
- What happens to information when a director, adviser or employee joins another startup?
- Are confidentiality obligations and return-or-destruction rules written into the documents?
- How are conflicts handled if the company pivots into an existing portfolio company’s market?
What founders and investors should take from the dispute
The Factory-Cognition episode shows that the conflict is not merely theoretical. Investment overlap, board access and executive hiring can collide in a fast-moving market, and public allegations can damage trust even when no tribunal has determined that information was misused.
Founders should evaluate an investor’s governance mechanics as carefully as its valuation, brand or introductions. Investors, meanwhile, must explain how they will preserve confidentiality while supporting multiple companies whose products may converge. The old one-company-per-category pact offered a simple signal of loyalty; AI has replaced that simplicity with a continuing negotiation over access, recusal and disclosure.
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